IBM to buy PWC Consulting

$3.5 billion deal to add 33,000 to Big Blue's staff

By

MikeTarsala

ARMONK, N.Y. (CBS.MW) -- IBM announced Tuesday that it would buy the consulting arm of PricewaterhouseCoopers for $3.5 billion in cash and stock, in an effort to boost lackluster sales.

The deal is expected add 33,000 PWC Consulting employees worldwide to IBM's 150,000 global services payroll. Pending the approval of regulators and local PWC firms, the companies said they hope to close the deal by the end of the third quarter.

"Our customers are looking for more than just hardware and software products," said John Joyce, IBM's chief financial officer. "They want to know how an integrated technology plan can drive their own business plan." Joyce said that the PWC acquisition would help drive business efficiencies for IBM customers.

Shares of IBM
IBM, +1.33%
a component of the Dow Jones Industrial Average, fell 61 cents to close at $71.79 in the regular trading session on the New York Stock Exchange. The stock lost another 70 cents in after-hours trading following the announcement.

IBM said it expects to pay for the deal with $2.7 billion in cash, a $400 million convertible note, and $400 million in stock. Management said the deal will reduce earnings by almost 30 cents a share in the fourth quarter -- analysts had expected Big Blue to earn $1.40 a share, on average. The company said the acquisition could start contributing to earnings in the second half of 2003.

IBM will merge PWC Consulting unit with its business innovation services unit, part of its global services group. Ginni Rometty, a general manager of IBM global services, will become general manager of the new unit, executives said.

The proposal marks IBM CEO Sam Palmisano's first acquisition attempt since he took over in March for the retiring Lou Gerstner, which has faced an SEC accounting inquiry, a string of job cuts and pressure from shareholders to boost sales. In particular, IBM's flagship services group has struggled to keep sales steady with year-ago results for two consecutive quarters.

"IBM hasn't been growing, given the falloff in tech spending," said Barry Jaruzelski, managing partner of the global tech practice at Booz Allen Hamilton in New York. "This acquisition is one of the only ways to grow, by adding 30,000 people that are billable to customers."

Buying PWC Consulting would cap a string of pricey moves by IBM to scale back money-losing operations, while beefing up profitable ones. In the second quarter, IBM racked up $825 million in charges for the reorganization of its microelectronics business, an $802 million hit for job cuts in other parts of the company, and a $428 million write-off for the discontinuation and sale of its hard-disk-drive business to Hitachi
HIT, +20.00%

"We are getting out in front of the industry shifts to build on our financial competitiveness," Joyce said earlier this month, following the company's earnings report. "We continue to improve our position in the industry for when demand picks up."

From PWC's perspective the consulting group sale will cut the company free from regulatory constraints that separated consulting and accounting work, said Samuel DiPiazza Jr., PWC's chief executive. The roughly 117,000 PWC employees remaining will focus on accounting and related services.

PWC Consulting said the acquisition cancels its planned initial public offering, which the company planned to call "Monday" -- a name Jaruzelski bemoaned as one that was destined to fail with customers.

IBM's deal also marks the second major public bid for PWC's consulting arm. Hewlett-Packard
HPQ, +2.45%
attempted to buy the unit in late 2000 for as much as $18 billion, only to pull out of negotiations several weeks later. After the failed H-P deal, PWC split its consulting group from the rest of the company.

Management at H-P said that they, too, had an opportunity to buy PWC Consulting in recent weeks, but chose not to go through with the deal. The combination would have resulted in nearly 100,000 H-P services employees, and sales of nearly $20 billion a year.

"This integration will be hard to do," the company said in a statement. "We understand how hard it will be to integrate these two businesses because of the PWC partnership model, and that some customers will perceive this as a loss of independence."

H-P said it will continue to jointly sell with other technology services companies, including Accenture, KPMG, Deloitte Consulting and E&Y Cap Gemini - all competitors to PWC Consulting.

Of note is that H-P gained the majority of its services employees when it acquired Compaq Computer in a controversial merger for $18.6 billion in May. When the deal was announced in September 2001, some analysts huffed that it would mire the company in a sticky business integration for years.

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